Wajid Ventures has been operating video stores since 1995 in Gulberg Lahore. When the video casettes business, and then later CD/DVD rental business declined, he moved into buying commercial plots & buildings in new phases of DHA Lahore, since 2010. Their model is very simple, Buy land of buildings, and then rent them to restuarants/offices/banks/bakeries. With the fast paced construction of houses in DHA phases, they have been minting money on this business line since 2014 every year. For religious purposes and conservative investment attitude, the CEO, Faizan Wajid has always avoided taking debt, and has put in all the money from his personal or family wealth as equity.

Right now in March of 2020, the company has 10 million shares and after a successful IPO in 2017, the shares are trading at PKR 40. Recently Anusha, an old friend who was Faizan's classfellow at LUMS and also works as a financial advisor to him has found a large 10 acre of farm land available for sale in on Bedian road. Anusha suggested that since she knows the seller, she is confident that the she can get the sale done for PKR 45 million. And with expansion of Lahore city, and ring road completion this area has a huge potential, and she is sure it can get him PKR 12 million of rental income easily.

Anusha crunches some numbers and suggests that the current cost of capital of Wajid Ventures is 12 percent. To her it seems high since the company hasn't been taking any debt and been relying on equity completely. With the recent cut in interest rates in Pakistan, she calls up Agha Fahad, another of their old classmates, a hotshot investment banker in Karachi, and finds out that she can raise debt for as low as 7 percent. Anusha calls up Faizan and says, "I have done my homework and we need to readjust our capital structure to 25% debt and 75% equity. That's the optimum level considering we are paying 39% corporate tax"

1.If Faizan wants to provide maximum benefit to his shareholder's should he buy the land or not?

a.If you think he should buy the land, should it be debt or equity financed?

2.Suppose Faizan is swayed by Anusha's recommendation to buy the land. But he sticks to his equity only decision.

a.What is the net present value of the project?

b.How would their market value balance sheet look like before he publicly announces the decision?

c.Will the share price get affected? If yes, what would the new share price be?

d.How many shares does he need to issue to raise the required capital?

e.Would his market value balance sheet change after equity issuance? If yes how would the new balance sheet look like?

3.Actually Anusha and Agha Fahad are able to convince Faizan to issue debt instead of equity to buy the land.

a.How will this decision impact the market value of Wajid Ventures

b.How would his market value balance sheet look like after the deal is done.

4.What should be done to maximize the share price of Wajid Ventures?

5.If Faizan decided to have a payout ratio of 100% from this project. What would be the total dividend per share (assume it was zero before)

a.If financed by debt.

b.If finance by equity